Rate Lock Duration

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The Truth About Appraisals

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The Truth About Appraisals
Knowing the Guidelines Solves the Mystery

The appraisal process often baffles consumers. They may feel that their home is worth a higher dollar amount, and so the appraised value doesn't always make sense to them. It is important to know that the appraiser is completely independent from lenders, buyers, sellers, and Real Estate Agents, and that the guidelines to which they adhere are dictated by the Uniform Standards of Professional Appraisal Practice (USPAP) and Fannie Mae. In most states, the mortgage lenders must also disclose the purpose of the appraisal, as each transaction carries its own set of rules.

In essence, these important guidelines help appraisers put a fair market value on homes based on comparable sales in the same area, and the home must be bracketed in size and value.

For example, there is no set dollar figure associated with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $30,000, but the local marketplace supports the value of a pool at $15,000, then that item will be bracketed as [$15,000] on the appraisal.

Upgrades can usually be expressed at a higher percentage of their value in newer homes because the only way to obtain those upgrades was to put more money into the cost of building the home. On the other hand, the upgrading or remodeling of an older home is rarely reflected in full in the final appraisal. This is because typically 25-40% of the project involves demolition and the fixing of issues that aren't uncovered until the project has already begun, such as plumbing or wiring that may need updating.

Ultimately, the value of the upgrades must be supported by comparable examples within the same marketplace. These comparisons must be drawn from current market activity within the last six months. This is a safeguard to prevent appraisers from attaching too high a value to the home in question, and opening up the appraisal for review. This guideline further states that appraisers can only base their opinion on the value of homes that have actually closed escrow.

As a loan professional, I make a point to follow the appropriate guidelines at all times. This promotes a good relationship with the lender, and helps to create easier and much smoother closings for my borrowers.

Greg Schneider
V.P. Residential Lending
PHH Home Loans
Phone: (847)686-0158
Fax: (847)686-0158
gxschneider@cbburnet.com
http://www.GregSchneiderOnline.com

Choosing a Fixed Rate Loan

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What Is a Prepayment Penalty?

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A prepayment penalty is a fee charged to borrowers that make full payment on their mortgage, or pay off a substantial portion (generally anything exceeding 20% of the total loan amount), ahead of schedule. This is a clause written into some contracts to protect the lender's book of business in exchange for providing a lower interest rate, or for providing financing to a high-risk borrower.

Prepayment penalties vary with different lenders, but generally apply to a one-, two-, three-, or five-year period of time. This fee can be expressed as either a specific number of months' interest or a percentage of the outstanding balance. A 'hard' prepayment penalty applies to either the refinance or the sale of a property. A contract written with a 'soft' prepayment penalty permits the borrower to sell their property without incurring a penalty, but does restrict refinancing for a set period of time. It is important for the consumer to know that a prepayment penalty is the borrower's choice and should never be considered a requirement!

Make sure you are working with a reputable loan professional who is aware of your long-term plans before consenting to sign off on an agreement that includes a prepayment penalty! Always ask for a written evaluation of your loan options.

Ways to improve a Credit Score

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With identity theft on the rise, consumers are becoming increasingly aware of the importance of reviewing their credit reports. However, their thoughts about credit and its long-term impact upon their financial future typically end there until it's time to apply for a home loan. A credit score is used to evaluate how likely a borrower is to repay their loan. There are several actions a person can take to impact their score. Here are a few to keep in mind.

If someone has a credit card which has a high balance, while their remaining credit cards have low or zero balances, it's best to distribute the debt across the cards in order to change the ratio of debt to available credit.

Many consumers believe that they should close an existing credit card account if the card is inactive. It's better to keep the account open and use it periodically in order to take advantage of its contribution to their long-term credit history.

With the flood of credit card offers that come in the mail, it may be tempting to open new accounts. However, these "pre-approved" offers are not approved until the companies run a credit report which will temporarily impact the applicant's credit score. In addition, experts recommend that a person maintain between two to five credit card accounts, total, so it's best to avoid accumulating too many.

There are several factors that contribute to a credit score. But by observing the tips above, as well as making payments on time and keeping balances as low as possible, a consumer is sure to achieve superior results.

High Credit Score = Low Mortgage Rate

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Credit scoring was developed in the 1960s as a means to determine whether or not consumers were likely to repay their loans. The score ranges from 350 to 850 with a higher score being extremely favorable. Essentially, a high credit score translates into lower interest rates for the borrower.

There are five factors that comprise the credit score. Payment history accounts for 35% of the score; outstanding credit balances have a 30% impact; credit history makes up 15%, type of credit factors at 10%; and inquiries influence the score by 10%. This gives the lender a snapshot of an individual's sense of financial responsibility and ability to pay back loans.

There are many quick tricks to improve the credit score, and I can provide borrowers with more information on this subject. If necessary, I guide them to a reliable resource for credit remediation. If a borrower has to pay a higher interest rate to close a loan, the tarnished credit rating will begin to improve once mortgage payments are made on time and in full. If that is the case, my team and I will be on the watch to alert the borrower when an opportunity arises to refinance and get a lower interest rate.

Rate Lock Duration

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Lock durations can vary for mortgage financing, but most lenders lock in the interest rate for 60 days from the date the loan application is submitted. As long as the loan is closed within that lock-in period, the lender honors the agreed upon interest rate.

Some consumers are misled by advertising that quotes unrealistically low rates based on 15- or 30-day lock durations. This is called 'short-pricing.' The lender basically knows the borrower doesn't have time to meet their conditions and have all the necessary paperwork in order within that brief time period. As a result, the lender is not obligated to honor the low rate that was listed in their advertising.

For simple refinance transactions, a 45-day lock-in period is more realistic. For purchase transactions, which are typically much more complex, you're much safer going with a 60-day lock, even though the interest rate might be a little higher than the rate you see quoted on billboards and the Internet.

Borrowers should make sure they have a written rate lock agreement, and allow themselves a reasonable amount of time to close their loan. I prefer to lock in all my clients as soon as their application is filed, rather than gamble with predicting short-term interest rate movement. My team and I focus more on assisting clients with long-term goals and management of their mortgage debt to secure a strong financial future.

The Difference Between Pre-Qualification and Pre-Approval

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Pre-qualification is the first step in obtaining mortgage financing. A potential borrower answers a few questions to provide the loan consultant with a quick snapshot of the borrower's income, existing debt, accumulated savings and whether or not there is a co-borrower. Signature(s) allow the loan consultant to run a credit report and begin to determine what loans are good candidates for this particular client. However, there are literally thousands of loan programs available. It is important for the loan professional to know the long-term financial objectives of the prospective homeowner.

Pre-approval is a written documentation that proves the borrower has full support of a lender. It means the form 1003 Uniform Residential Loan Application has been completed and reviewed by an underwriter. Based on the borrower's income, debt ratio and savings, the underwriter will provide a dollar amount this borrower is eligible for. Now the borrower has the convenience of shopping for a home in the price range agreed upon by the lender.

Pre-approval allows potential homeowners to shop as cash buyers, and that means negotiating power. The seller will take an offer from a pre-approved shopper much more seriously and may even accept a lower bid because they know the financing is in place and the deal is secure.

PMI deductible for many homeowners

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How Adjustable Rate Mortgages Work

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During the last decade, Adjustable Rate Mortgages (ARMs) have increased in popularity among consumers. These days, few homeowners (especially first-time buyers) remain in their homes for more than seven years. In this case, it often makes sense to get an adjustable rate mortgage with a lower rate, especially one with a 5-year or 7-year fixed portion, since they won't have the loan long enough to be concerned about rate fluctuation.

Adjustable Rate Mortgages have three main features: Margin, Index, and Caps. The Margin is the fixed portion of the adjustable rate. It remains the same for the duration of the loan. The Index is the variable portion. This is what makes an ARM adjustable. Margin + Index = Interest Rate.

It's important to understand that there are many different indices: The 11th District Cost of Funds (COFI), the Monthly Treasury Average (MTA), The One Year Treasury Bill, the Six Month Libor, etc. Each index has its own strengths and weaknesses; some are slow moving, others are more aggressive.

The third and final component of Adjustable Rate Mortgages is Caps. Caps limit how much the rate can fluctuate over time. Annual Caps limit changes to the annual rate, whereas Life Caps provide a worst case scenario over the life of the loan.

What Is Title Insurance?

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Title insurance is a policy that is usually issued by a title company to protect the lender against something that might have happened in the past, rather than something that might occur in the future. In essence, an extensive search of public records is conducted by the title company to validate who has held title to the property in the past. The lender wants to know if there are any liens, judgments or easements on the property that they should be aware of.

But title insurance also guards against hidden risks or unknown factors that might cause an encumbrance at some point in the future, such as unknown heirs, forged deeds or wills, misinterpreted wills, false impersonation of the true owner of the property, deeds signed over by persons of unsound mind, or defects in the recording of past titles. Title insurance covers the cost of the title search, and any legal fees that may result from any dispute over past property ownership. It is required by the lender and paid for by the buyer.

The smart home buyer will also purchase title insurance to protect their own interests. This is a one-time premium that protects the buyer or their heirs, as long as they retain an interest in the property.

What is Negative Amortization?

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A negative amortization loan is an adjustable rate mortgage that allows the consumer to tap into home “equity” by offering several monthly payment options. Up to an additional 25% of the original loan amount is available to the borrower.

This flexibility works well for consumers who have seasonal income or want more control over their cash flow. However, the borrower must have some degree of financial discipline. Each month, the borrower will choose to make a fully amortized payment, an interest-only payment, or a low introductory rate payment.

A fully amortized payment is larger, and includes payment toward principal + interest. The interest-only payment is lower, but no part of that mortgage payment goes toward the principal. The borrower is simply keeping their head above water.

The third option is where negative amortization comes into play. If the consumer chooses to make the low introductory rate payment, the interest is not sufficiently covered for that month. The balance of interest owed is then tacked back on to the principal, thus increasing the mortgage debt.

Smart consumers can use these payment options to their advantage, but should have a full understanding of how adjustable loans work. They should also know that once the maximum loan amount has been reached, the lender will immediately increase the payment amount to the fully amortized rate.

What Are Points and When Should You Pay Them?

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Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends.

If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. Paying a point up front saves $100 a month but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the 30-month mark, your money is lost. In this case, you would benefit financially by remaining in the home longer than the 30 months.

Rates run in cycles. When rates are at historical lows, it is sensible to pay points if you plan to live in the home for an extended period of time. It is unlikely that rates will go down; hence, there will be no need to refinance.

When rates are up, there is a strong likelihood that they will come down. This is no time to pay points. The chances of refinancing in the future are extremely high, and you will likely not be in the loan long enough to recuperate the cost of the points.

Interest Rates Change Daily

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Interest rates change constantly, but it is important to know that rates are cyclical. If rates are currently at historical lows then we know there is a strong probability rates will go up again, and vice versa. Certain economic indicators such as unemployment data, consumer price index, retail sales data, and consumer confidence all have an effect on mortgage interest rates. But the key factor to watch is the relationship between stocks and bonds.

When the economy is slow and the stock market is "bearish," many investors move money out of stocks and into bonds and mortgage-backed securities. This causes mortgage interest rates to go down. When the economy is doing well, the stock market rallies and is considered "bullish." Investors then have a tendency to move their money out of that safe haven of bonds and mortgage-backed securities and back into stocks. As a result, mortgage interest rates go up.

PMI Is Now Deductible

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Why Rent? Advantages of Home Ownership

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It's staggering when you think about the cost of living, especially if you're a renter and not a home owner. If you are currently paying $1,000 a month for rented housing, over the next three years your property management company will effectively have reaped $36,000 of your hard earned cash. In most cases, you know your rent will go up every year, even if you live in an area that has rent control regulations. You're paying the mortgage for the property owner, when you could be building equity in your own real estate investment.

The tax deductions available to homeowners vary, but there are solid rules the IRS lines out for us. Real estate taxes, mortgage interest, pre-paid interest, and interest on construction loans are all things to take into consideration as tax benefits.

If you or someone you know is currently renting, I urge you to call me to discuss the many low- and no-down payment loan programs that are currently available to prospective home buyers. My team and I work cohesively with the borrower's financial consultant to ensure the client's long-term goals are met.

Will I Have To Pay Capital Gains Tax if I Sell My Home?

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The IRS permits a maximum exclusion on capital gain of $250,000 for individuals and $500,000 for married couples filing a joint return who sell their home, but of course some conditions apply.

For the five-year timeframe prior to the date of the sale of your primary residence, you must meet the Ownership and Use Tests the IRS provides in Publication 523, Selling Your Home. These rules ensure you have owned the home for at least two years, and lived in the home for at least 24 months out of the last five years. Additionally, you may not have excluded a gain on your taxes from the sale of a different home within the last two years. Note that if you sell your property for less than your original purchase price, you cannot claim a capital loss.

A 'reduced maximum exclusion' can apply to those who must sell their home due to a change in their place of employment, health issues, or unforeseen circumstances that affect qualified individuals. In all cases, it is best to consult your tax professional or IRS guidelines if you have any questions about the taxes you may be responsible for if you sell your home.

What Constitutes Closing Costs?

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Closing costs are expenses that cover fees associated with the transfer of property ownership, fees paid to state and local governments, and the costs of obtaining a mortgage loan. Some of these fees are negotiable, and could be paid by either the buyer or the seller. Some costs are one-time fees (non-recurring closing costs, such as title search, termite inspection, appraisal, etc.); while other fees such as homeowner's insurance or property taxes are things you will expect to continue to pay on a regular basis as a homeowner.

As part of the loan selection process, your mortgage consultant should be giving you some idea of how much money you should have in reserve to cover your end of these costs. The Real Estate Settlement Procedures Act (RESPA) requires the lender to provide you with a Good Faith Estimate within three days of the submission of your loan application.

RESPA also states that as a home buyer, you have the legal right to request a copy of the HUD-1 Settlement Statement 24 hours before your closing is scheduled. The HUD-1 clearly defines all closing costs, including those that are to be paid by the buyer and the seller. It's a good idea to have both of these forms before your closing so you can compare the estimated costs to the actual costs before you finalize your transaction.

15-Year fixed Rate Loans

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A 15-Year Fixed Rate loan works well for borrowers who are nearing retirement and want to be debt-free when they get there. Because payments in a 15-year scenario are amortized over half the length of a 30-Year Fixed Rate loan, the monthly payments will be significantly higher in comparison. This is an important factor to consider before committing to a 15-year loan. However, the interest rate on a 15-Year Fixed Rate loan will be lower for the same reason - financing for 15 years costs much less than financing for 30 years.

If a borrower is 50 years old and would like to be debt-free when retiring at age 65, then a 15-Year Fixed Rate loan will allow the borrower to meet that goal as far as their mortgage is concerned. However, if there is any question as to whether the borrower will be able to commit to the higher monthly payment, the alternative is to take a 30-Year Fixed Rate mortgage and make pre-payments with some consistency. If the borrower has the discipline to make those extra payments whenever possible, he or she can still attempt to meet the same goal.

I prefer to educate my borrowers so they can compare the benefits of each program and have the opportunity to review loan options with their financial advisors.

Intermediate Fixed Rate Loans

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Intermediate Fixed Rate mortgages (sometimes referred to as Short-Term Fixed Rate mortgages, or Hybrids) come in numerous varieties; the 3, 5, 7 and 10-Year Fixed. These are all 30-year loans that carry a fixed rate for a set number of years, and then roll over to an Adjustable Rate Mortgage.

For example, in a 7-Year Fixed Rate scenario, the rate would be fixed the first seven years, and the loan becomes an Adjustable for the remaining 23 years. The main advantage of these hybrid programs over a traditional 30-Year Fixed loan is typically a slightly lower interest rate.

These types of loans often work well for people who do not plan on being in their home for an extended period of time, such as first time home buyers. The most important question to ask when going into an Intermediate Fixed Mortgage is how long will the borrower need the money?

If the borrower intends to sell the home in four to five years, then a 5-Year Fixed loan offers stability and a lower interest rate for the time that money is needed. However, in this example it would not be wise to pay points up front to obtain a lower interest rate, because the likelihood of recuperating the cost of those points would be diminished with the short tenure in the loan.

The borrower's financial planner and mortgage consultant should work hand-in-hand to provide guidance to the borrower in these matters.